Maximizing Returns on Fix-and-Flip Investments
Using All Available Data to Your Advantage
By Mitchell Zagrodnik
The real estate market has been in a state of flux in recent years. Since the middle of 2022, the higher rate environment combined with an overall lack of inventory throughout the U.S. has left many prospective buyers and sellers to navigate an extremely challenging real estate market.
One of the most popular investment strategies utilized today is fix-and-flip investing. What makes this strategy so attractive is the ability to make quick returns, and, at the end of the day, what makes an investment worth your time and money is the overall return on investment. In an ever-changing housing market, savvy investors are always looking for advantages to stay ahead of the curve and find the best possible scenarios for their portfolio.
In order to ensure a profitable fix-and-flip investment, it is crucial to understand that being selective in your property choices is necessary, as not all projects are good fits for these types of scenarios. Location is an immense factor. Doing the research to understand the current market, where it is headed in the future, and what areas throughout the U.S. are profitable and which to avoid, can give you a huge advantage in the space when it comes to maximizing your returns.
The Current Landscape of the Fix-and-Flip Market
Rehabbing homes for sale has only continued to grow in popularity over the years, with more and more people looking for financial independence wanting to capitalize on these opportunities. That said, it is important to recognize that along with the overall housing market, the fix-and-flip industry has had its fair share of challenges in recent memory.
According to recent data provided by ATTOM, in 2023 there were 308,922 single family homes and condos flipped, making up 8.1% of all home sales. Meanwhile, 2022 was record-setting, with roughly 437,000 houses flipped, making up 8.4% of all home sales. Another point to make note of is that since 2016, gross profit on flips has been consistently between $60,000 and $70,000. But in that same timeframe, the average return on investment has been consistently dropping as well, from upwards of 51% returns in 2017 to nearly half that in 2023 at an average of 27.5%.
What has been a great sign of optimism as well, is that as of June 2024, house flipping activity has increased nationwide for two consecutive quarters, with that average ROI jumping back up to 30% for the first time in a year (ATTOM). This is a positive sign for the flipping industry, but it is also important to recognize that there is still difficulty hitting higher profit margins in a majority of areas throughout the U.S., after expenses, when flipping a property.
Keep in mind, a 25-30% return on investment is still a great return, so this data should not sway you away from pursuing these deals. But the reasons for these dwindling returns can be attributed to several factors. Rising median home prices, rising material costs, and a higher rate environment leading to less interest from potential buyers are all valid claims to that notion. However, there are some measures you can take to make the most on your investments.
Maximizing your Returns
The ideal scenario for a fix-and-flip is to finish the rehab quickly and efficiently, and then sell the property as soon as possible. Most investors will go the avenue of securing financing through a lender, and these loans are often structured with no prepayment penalty.
For example, this means that on a short-term fix-and-flip loan with a 12-month term, if the project is completed three months into the term and the property sells, then the borrower can pay off the loan without any penalty and maximize their ROI.
A great way to make sure your property sells quickly is to not wait until the rehab is complete before finding a prospective buyer. Investors can give themselves an advantage by networking with buyers or even utilizing a realtor to search for buyers while the property is being renovated. It is not a difficult sell for those searching for a home when they have the opportunity to live in a newly renovated home, and on top of that you can secure a quick sell upon completion.
Hot and Cold Areas for Flipping in the U.S Market
The rise in popularity of fix-and-flips as well as an ever-expansive array of data grants you access to ample amounts of tools and information at your disposal to make the most of the opportunities throughout the country. It is no secret that many investors nowadays are investing in states outside of where they live thanks to this availability of information. So where in the United States are flippers making the most bang for their buck?
Data provided by ATTOM from Q1 of 2024 shows the areas with the highest returns on investment as of 2024 are:
» Buffalo, NY at 127.8% ROI
» Reading, PA at 124.9%
» Pittsburgh, PA at 120.6% ROI
» Scranton, PA with an average return of 115.7%
» Harrisburg, PA with 113.6% ROI
It is clear that there is a major concentration in the Northeast region of the U.S., with Pennsylvania seeming to be the most noticeable. The reason for the higher returns can most likely be attributed to these locations having home values that are relatively lower in desirable areas where there are a plentiful number of buyers.
Metro areas where we are seeing the lowest ROI are led by:
» Austin, TX at 0.3% ROI
» Honolulu, HI at 1.7% ROI
» San Antonio, TX at 2% ROI
» Dallas, TX at 5.3% ROI
» Houston, TX at 8.4% ROI
The trend to notice here is that these are cities that have experienced immense growth within the past five years, and four out of the five metro areas listed are in Texas. Even though these are desirable areas that people are moving to, the home values in these areas have skyrocketed. Austin is a prime example of this. According to Zillow, the median list price as of June 2024 is $614,967. In 2019, that number was roughly $378,559, so the value has nearly doubled in that time.
Access to all this data and information is readily available online. As investors who are always on the lookout for the next deal, utilizing this information can offer insight into where you can take advantage of the current trends, as well as try and pinpoint where the next up and coming markets will be.
Step Outside your Comfort Zone and Use your Connections
It is completely understandable that the numbers for fix-and-flip investing are not hitting the same highs as they were several years ago. The current rate environment along with lower inventory numbers are making it tough as well. Opportunities still exist throughout the U.S., however, and there are clearly areas where investors are taking advantage and making a killing.
If the current market you work in is not showing much activity, go online and look for surrounding areas where the market is untapped. Connect with your lenders and real estate contacts and see what is out there. Doing so can make a huge impact on your business and open up new opportunities.
